Demand response in adjustment markets for electricity
Résumé
This article examines the participation of consumers in adjustment
markets for electricity power. These markets allow market participants
to respond to random supply shocks occurring after quantities have
been contracted. Under perfect competition, opening the adjustment
market to consumers always increase ex post efficiency, hence welfare,
as expected. However, this result is not robust to strategic behavior by
consumers who hold private information on their value for electricity
power. We prove that under such information asymmetry, allowing
consumers to enter the adjustment market may reduce welfare. This
arises because suppliers limit the information rents they must abandon
by proposing inefficient ex ante retail contracts. If the value of ex
post efficiency gains due to consumers’ participation is low, whereas
the information distortion is high, the overall net effect is a welfare
decrease.
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